Hedge Fund Losses Prompt Exits as Deadline Looms (ZT)

August 14, 2007
Hedge Fund Losses Prompt Exits as Deadline Looms
By REUTERS
Filed at 8:23 a.m. ET

BOSTON(Reuters) - For hedge funds, August 15 may be D-Day, when investorsrattled by heavy losses demand their money back from big and smallportfolios alike.

"We are seeing a 'shoot first and askquestions later' mentality among many investors," said PhilippeBonnefoy, chairman of hedge fund advisory group Cedars Partners,describing how everyone from the wealthy to chief investment officersat endowments are now shunning risk.

Unnerved by heavy losses atsome of the $1.75 trillion industry's most famous offerings, includingAQR Capital Management, Highbridge Capital Management, D.E. Shaw andGoldman Sachs [GS.N], many people want out before things get worse.

Butexiting can be a difficult process in an industry where managersroutinely lock up money for months, if not years, and often require 45days' advance notice before returning it.

To pull out at the end of the third quarter, investors will have to notify their managers by August 15.

"Everyonealways waits until the last second to get out, and (Wednesday) is thelast second," said Mike Hennessy, managing director at hedge fund offunds Morgan Creek Capital.

Redemption notices began piling upweeks ago at hedge funds that specialize in subprime mortgages aftertwo prominent Bear Stearns funds collapsed.

Now, what seemedlike a contained problem has spread from credit-focused strategies to abroad range of funds, including one with a so-called market-neutralfocus, that are not supposed to see huge losses, analysts and investorssaid.

Market-neutral funds, which hope to exploit marketdiscrepancies by buying undervalued securities and taking an equal,short position in a different and overvalued security, returned nearly6 percent during the first seven months of the year, delivering some ofthe industry's more robust performances. But the U.S. stock market'srecent quick-paced decline, followed by a brief rally and then morelosses, erased all gains and left the group with losses, according toinvestors who have seen weekly numbers.

"I expect there will bea lot of redemptions in market-neutral funds," said Andrew Fisch, aportfolio manager for funds of funds at SSARIS Advisors. "The realityis, you will probably see redemptions across the board."

Investors said that while the race away from risk is not limited to hedge funds, it is being felt hard in this asset class.

Becausehedge funds can use leverage, or borrowed money, and sell securitiesshort, losses can add up faster here than in mutual funds, for example.

"Nochief investment officer is going to get fired for deciding to get outof hedge funds right now," Cedar Partners' Bonnefoy said. "You canalways reinvest later on."

Industry sources said it isimpossible to estimate how much money will leave hedge funds at the endof the third quarter, but they agree the sums will be large. Hedgefunds took in $60.2 billion in new money during the first quarter, withfunds specializing in distressed securities, arbitrage and event-drivenstrategies seeing the bulk of inflows, data from Hedge Fund Researchshow.

The last time hedge funds suffered net outflows was during the fourth quarter of 2005, according to HFR.

Forthe money coming out, there may be no better investment options,investors agreed. "When people pull out because they are scared, theygo to cash," said SSARIS Advisors' Fisch.

But some industryadvisors are urging people not to throw in the towel quite yet becauseproblems in portfolios will be repaired. "While there are certainlyfunds that will suffer now, I think when we look back on this period itwill turn out to have been a very good one for hedge funds," saidThomas Whelan, chief executive of Greenwich Alternative Investments,which tracks performance in the hedge fund industry.

(Reporting by Svea Herbst-Bayliss)